Last week, I wrote an article here about money: specifically, how money can cause problems in the next generation after they’ve inherited a farm.

Not soon after I started writing this article, which is also about money, but in the context about the money chasing farmland.

This started after I heard about 375 acres of prime farmland that sold last week for unearthly sums of money. It’s located in my home area of Warren County, Ill., and sold in 5 tracts by public auction, as follows:

This $8.5 million of real estate is purely agricultural and does not have any development potential. A land appraiser says the buyers were investors with 1031 money, but local farmers were also in the mix to take the bidding to these levels.

When I first saw these results I asked myself: wow, where is this money coming from? One of my farming friends sent me a message soon after asking: when will the money stop chasing farmland?

Cash and equity

Cash, money and equity came up yet again this week while I listened to presenters at Iowa State University’s annual Agricultural Law and Tax seminar. Ag economist Jason Henderson opened the conference with his outlook for agriculture and the economy. Guess who he said is the biggest competition for ag banks right now? Cash, he said, and build-up equity which farmers are still sitting on. Big piles of it, apparently.

Related:Dad warns kids: Don’t let money ruin the family

I’ve made the point before that despite an increased interest from investors and “new money,” farmers still remain the primary buyers of farmland. So, as much as I’d like to see land prices come back to “normal” levels, I’m actually torn, because if farmers still purchase nearly two-thirds of all farmland, this means a land market correction may come as a result of farmers having less available cash and build-up equity.

Farm returns

Farm producers have enjoyed a nice run of strong profits and high liquidity. However, recent projections from USDA are expecting U.S. farm income to see a record 23% decline this year due to a combination of high expenses and weaker prices for major crops and livestock.

We are also moving into a period of increasing debt service and borrowing. It makes sense this would make less cash available for capital expenditures such as land purchases. However, will this be enough to cool the land market? Will we continue to see new money purchase farmland, despite lower returns?

Land economics

Most land professionals believe there is still enough money out there to hold land prices steady. We all know farmland is a more sought out asset in part because ‘they’re not making any more of it.’ Others believe it’s too soon to tell and strong inflation could cause yet another leg up in the land market.

Related:Who should own farmland?

If we take a look at just 80 of the 375 acres that sold last week for $23,200 per acre, this is a total of $1.85 million. Most lenders I’ve spoken to say they want to see around 35% cash or equity into a new land purchase. This translates to a cash down payment of $650,000. The resulting 65% LTV loan at current interest rate levels of near 8% is an annual loan cost of around $100,000, or $1,250 per acre. 

If the net income from this new land purchase is near $350 per acre, this is a 1.5% return if the value of the asset is $23,200 per acre. This compares to a bank CD which now may earn you 5% returns.

Who holds the money

Who is impacted the most by all of this? Unfortunately, young and beginning farmers. They don’t have a lot of capital or built-up equity and are the group in our industry that hold “little money” and can’t compete against the “new money” coming in and those holding the “big money.”  

In Iowa, it is estimated only 13% of farmland is owned by those 55 years or younger. And, as we look ahead, I don’t think this is necessarily a debate over outside money coming into agriculture, but rather, big money versus small money. Big money will likely always win out because it is well capitalized and can afford to subsidize land purchases from other income sources.

I thought it was interesting an ag economist concluded his presentation this week by asking the audience several questions which concern him and his outlook for agriculture:

My takeaway is that even though those with the big money will likely never stop chasing farmland, we need to get more involved in supporting the people who hold the little money.

Downey has been helping farmers and landowners for the last 23 years with their family farm transition, estate planning, leasing strategies, and general farm advising. He is the co-owner of Next Gen Ag Advocates and an associate of Farm Financial Strategies. Reach Mike at [email protected].